Forest, paper and packaging industry deal values fall by a quarter

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April 29, 2009 — According to a new PricewaterhouseCoopers (PwC) report, total deal value in the forest, paper and packaging (FPP) sector fell 23% to US$21.3bn in 2008, down from US$27.6bn in 2007. The report, entitled Forest, Paper and Packaging Deals 2008 , says that continuing financial market uncertainty, economic slowdown and a collapse in worldwide demand is plunging the sector towards a record M&A low in 2009.

Total deal value in the first half of 2008 surpassed that of 2007 which itself had been a high point in recent years. Buoyed by International Paper’s US$6bn purchase of businesses from Weyerhaeuser, first half total deal value across the sector in 2008 was US$16bn. However, second half total value fell to just US$5.3bn. The fall in overall FPP deal value takes M&A back to the underlying level seen in 2005 and, if it continues, puts it on course to rival or surpass lows last seen in 2003.

	2003	2004	2005	2006	2007	2008
Total deal value (US$bn)	11.4	18.5 (+63%)	21.0* (+13%)	25.7 (+23%)	27.6 (+7%)	21.3 (-23%)
Total deal numbers	224	254 (+13%)	295* (+16%)	280 (-5%)	370 (+32%)	349 (-6%)
Average value (based on deals where value is reported) (US$ million)	90.0	132.3 (+47%)	128.0* (-3%)	169.4 (+32%)	134.6 (-21%)	111.0 (-18%)
* 2005 data excludes exceptional US$22bn acquisition of Georgia-Pacific (GP) by Koch Industries in the US

Alexei Ivanov, Partner, Forest, Paper & Packaging Industry Leader, PricewaterhouseCoopers Russia said:

“Many companies in the forest, paper and packaging industries are facing unprecedented tough market conditions. As 2009 unfolds, many companies in the sector find themselves on a knife-edge and the industry looks set to undergo an intense round of painful distress-led transformation and likely to emerge in two or three years time looking very different from today.”

As in previous years, in 2008 pulp & paper production delivered by far the largest average deal size and, in turn, the largest total deal value. With US$11.9bn worth of deals, pulp & paper production accounted for 56% of total FPP deal value. Average pulp & paper production deal value was down 19% to US$233 million from an average of US$288 million recorded in 2007 and total deal value was down 10%.

Behind pulp & paper production, deals in converting (including distribution, such as packaging and tissue product producers, paper converters, paper merchants), comprised the second largest segment of deal value, with a total US$3.8bn of deal value or 18% of all FPP deal value. Converting’s total deal value was 35% down on 2007 levels and average deal value was down from US$82m million to US$61 million. Even bigger was the fall in the total value of forestland and forestry deals which fell 45% on 2007 levels to US$3.5bn in 2008. Average forestland and forestry deal size fell 16% from US$188 million to US$159 million.

Wood products was the sector where total deal value was most resilient, edging down just 1% or US$21 million to US$2.1bn in 2008. The 3% rise in wood product deal volume continues a trend of significant increases in deal activity in recent years. Deal numbers in this sector are running at twice the level of two and three years ago, albeit with smaller deal sizes and without any corresponding rise in total value. Wood products accounted for 34% of all deals in the sector in 2008 but, with an average deal size of just US$38 million, only 10% of total deal value.

European FPP deal volume declined 10% year on year from 147 in 2007 to 133 in 2008. Total deal value fell more sharply by 21% from US$6.1bn to US$4.8bn, much in line with total worldwide FPP deal value. Given that more than a third of the previous year’s total was attributable to the US$2.3bn acquisition of SIG Holding by Rank Group, deal values in 2008 were more evenly spread. The biggest 2008 deal was Finland’s M-real’s US$1.1bn sale of its coated graphic paper business to South Africa‘s Sappi (see Deal Makers section).

Pure private equity (PE) players featured in three of the top ten deals and the PE influence on deal-making in the sector remained very strong in 2008. Excluding forestland and forestry where real estate investment trusts (REITs) and timber investment management organisations (TIMOs) play a dominant role, PE played a part in 18% of all deals, accounting for 24% of deal value. REITs, TIMOs and PE together were involved in 19% of all FPP deals and 34% of total FPP deal value in 2008. Private equity will continue to play a major role in the sector with PE players seeking to capitalise on distress situations. PE is also likely to play an increasing role in the consolidation of the sector in the growth markets. In China, for example, there has been increasing involvement of PE players and this looks set to gain momentum although, hitherto, mismatches in valuation have restricted deal activity.

Wilfried Pototschnig, deputy head M&A Lead Advisory, PricewaterhouseCoopers Russia, concluded:

“Many acquirers are on the sidelines because of the uncertain outlook and the restricted access to capital. In many cases, where there are potential deals, mismatches in valuation have restricted deal activity. In summary the deal-making environment is beset with many and varied challenges and opportunities. Ultimately, deal-making is driven by relatively few factors, the most important of which are the existence of benefit and/or need and the availability of the required finance. With the industry on course towards significant restructuring, the first of these exists in abundance. It is the second which will determine the level and pace of activity in the period ahead.”

The global top ten — FPP deals 2008

	Month announced	Deal value US$m	Target	Target nationality	Acquirer	Acquirer nationality
1	Mar 08	6,000	Weyerhaeuser Co (containerboard, packaging and recycling business )	United States	International Paper Co	United States
2	Feb 08	1,710	iStar Financial Inc (portfolio of forestland & related assets )	United States	Hancock Timber Resource Group	United States
3	Sep 08	1,096	M-real Oyj (graphic paper business)	Finland	Sappi Ltd	South Africa
4	Mar 08	974	Papyrus AB	Sweden	Altor Equity Partners	Sweden
5	Jan 08	851	Southern Container Corp	United States	RockTenn Co	United States
6	Aug 08	783	Plum Creek Timber Co Inc (Timberlands)	United States	Campbell Group LLC	United States
7	Jun 08	621	Norske Skog Korea Co Ltd	South Korea	Morgan Stanley Private Equity Asia; Shinhan Private Equity Inc	South Korea
8	May 08	493	Weyerhaeuser Co (Australian timber manufacturing and distribution operations)	Australia	Rank Group Investments Ltd	New Zealand
9	Apr 08	485	MeadWestvaco Corp (North Charles Kraft Division and related assets)	United States	Kapstone Paper & Packaging Corp	United States
10	Jun 08	390	Ainsworth Lumber Co Ltd	Canada	Creditors; Tricap Partners Ltd; HBK Master Fund LP; Barclays Bank plc	Canada

Notes to editor:

For additional information, please contact Anna Kogosova, PR Assistant Manager.
Forest, paper and packaging deals is based on published transactions from the Dealogic ‘M&A Global’ database, January 2009.
Download Forest, paper and packaging deals: 2008 Annual Review

'PricewaterhouseCoopers' refers to the network of member firms of PricewaterhouseCoopers International Limited, each of which is a separate and independent legal entity. Herewith 'PricewaterhouseCoopers Russia' refers to PwC network member firms operating in Russia, each of which is a separate and independent legal entity.